Sunday, May 15, 2011

Produce with efficiency to rein in inflation: Subir Gokarn

CNBC-TV18’s Suresh Venkat spoke to the Deputy Governor of the Reserve Bank of India and one of India’s finest economists, Dr Subir Gokarn on the challenges a country like India faces with respect to inflation and what are the measures that can be taken to keep it in check.
Q: Are economists an ambivalent lot do you think generally speaking?
A: It is important from an analytical perspective to be ambivalent because it is not a precise science. Let us not delude ourselves about the scientific content of economics. There are analytical frameworks; there are ways of linking factors together to reach some sort of assessment of the situation. These we call models or paradigms. These are proven or disproven by data. So, paradigms are sometimes effective sometimes not. At the end of the day the value of a paradigm is its ability to address a whole range of alternatives. That is why you get to this one-hand, other hand situation which is that if you impose a certain scenario on a model you will get one outcome and if you impose a different scenario you will get another outcome. Let us not get too carried away with this sort of ambivalence because ultimately the economist is not the decision maker. Economics as a science is not leading you to the ultimate decision. It is leading you to a set of alternatives each of which is associated with some benefits and some costs.
Q: One of the knowledge inputs into judicial decision making?
A: Absolutely. The more precisely or more persuasively you can put these costs and benefits across, the more value it adds to the decision making. There is the profession of economics which feeds effectively mostly, sometimes not; into the act or process of decision making. It is the knowledge input. The more concretely you can put these alternatives forward with their respective costs and benefits, the more effective the decision making process becomes.
Q: You sometimes feel that we as a country are conflicted between good economics and bad politics?
A: If this is universal, the objectives of democratically elected political class argument. They have the fundamental need to be re-elected and they have to balance out what they do in the short-term to achieve this objective with the longer-term statesmen or vision dimensions of good politics. To the extent that they can achieve this balance without compromising too much on the fundamental economics or other principles that makes for a sustainable process. There are always trade-offs. At some point you feel that you are not the one who will win an election by focusing on the long-term. You need to do something quickly to achieve that objective how you are going to do it.
Q: The raging issue of the day is inflation. Inflation cannot be all bad if vegetable prices and food prices are going up somebody down the line, a farmer is getting more money for his crop. Why is it such a bad thing, if more people are making more money?
A: The simple principle that we have to consider here is - are we producing what we are producing with the greatest efficiency? If inflation is being driven by inefficiency, the fact that the productivity is much lower than it could be. Yes, the farmer benefits because there is a supply-demand gap; if there is more demand than supply that is when prices go up. If this can be dealt with by increasing supply through improved productivity, that would actually benefit the farmer and the consumer. When we look at opportunities for larger or mutual benefit and we see that these are not being exploited then we have a problem.  If you reach a point where somebody’s benefit can only come at somebody else’s cost, we have to accept that there is where there is a trade-off. But given a situation where with the undertaking of certain actions and here I am talking specifically about actions to improve both productivity of food and the efficiency of its distribution then you have a situation where farmers incomes go up but consumers pay lower prices, that is a sort of win-win, that is the kind of scenario. We have had this repeatedly in our own economy in the last twenty years. If you look at consumer durables they have gone up in volumes enormously. This has come both at the consumers benefit because prices have gone down and the producers benefit because profits and margins have either gone up or remained, they have not been compromised.  So you are making more money because you are producing more goods but because you are producing more of them you are doing it at lower costs and this is translating to lower prices for consumers. That is the opportunity which we have to exploit.
Q: Is that one of the key causes of inflation that we are seeing currently?
A: Yes, we are in a situation where five years of very rapid growth has resulted in very significant changes in food habits. People are consuming more proteins. When you look at what is driving food inflation, it is predominantly proteins, fruits and vegetables. This suggests that while demand has been rising which is very good but the production system has not responded. That is where the pressure is emerging and that is what we need to address.
Q: Given the current market scenario of high inflation, can we afford to have high growth and high inflation at the same time?
A: It is a complicated question. The conventional wisdom on growth and inflation is that eventually high inflation compromises growth because it creates additional uncertainty in the environment and therefore deters any kind of long-term investment. Over the years looking at the experiences of different countries, particularly, those which have had this situation of often not having very high growth but having very high inflation that it weakens the incentive for the most fundamental requirement for sustaining growth which is investment. The policy premise now is you cannot ignore it or let it get out of control because you are distorting the incentives that people have to invest.
Q: How do you think the Middle Eastern crisis will impact India in the near and the middle-term?
A: There are a set of forces that has now started to spread across the region. It is starting to absorb oil producing countries. The first two are not very significant in terms of oil and I am not in any way belittling the human and social aspect to it. But as far as oil goes, Tunisia and Egypt are not very significant, Libya we don’t know where these forces are going to manifest again. We also have to keep in mind that the distribution of oil resources is very skewed. Saudi Arabia and Russia have very large reserves. Their ability to influence global prices by simply raising production is quite significant. Now they have to make choices, Saudi Arabia particularly is clearly in the line of fire so to speak about how far they want to let oil prices go. Keep in mind that the only reason we as a global system remain so dependent on oil is because it is still more economical than other sources of energy. But that is not a given nor is it a constant. At some point, persistently higher oil prices will induce shifts in energy consumption patterns. We have seen this historically, through the 70s and 80s, as oil prices grow persistently, every system adapted. Technologies came into existence that reduced energy consumptions whether in auto sector or anywhere else. So, there will be a temporary disruption, no question. But the ability of technology to respond to this is proven. The ability to bring alternative sources of energy into the market including oil, because, if oil is at USD 120 and USD 130 there are reserves that do become economical at that price. I don’t see this as a sort of freeze; it is not a frozen situation. It is something that can evoke response, a supply response and a demand response. Disruption, possibly, but long-term implications I would be a little wary about drawing a doomsday scenario right now.
Q: I am going to quote something that you have written. You have said, “The unfortunate economic reality today is that the state far from being a partner and facilitated for a faster growth imposes an extra load on the system.” In affect the state is getting into way of growth. Can the state get out of the completely at all?
A: Where you quoting this from?
Q: From one of your articles.
A: It was a judgment based on my observation that when we went into reforms in 1991 we created a whole different world actually for the private sector, a whole new range of incentives both rewards and punishments that the private sector had to deal with, to the extent that the private sector responded. Many organizations, many who had done well earlier were able to reorient themselves and do very well in the new environment, many new organizations came into being and did extremely well in this new regime, many failed and that was the whole point that if you weren’t able to survive, there had to be some way of exiting. When you look at the organizational transformation that went on the way private sector responds to this new environment, it was phenomenal and that is something that I was observing. The reforms that we did in 1991 unfortunately did not spread to government despite good intentions and pious statements. The process of governance remained largely untouched. So, this is where the disconnect that I was emphasizing in that article, that the government did not keep pace with the economy in a sense. I still feel that even despite being in the government system now there are many ways in which the processes of knowledge simulation of decision making was from my outsider viewpoint could stand enormous improvement.
Q: How do you make a monopoly efficient?
A: You do it in two ways. You reduce the scope of its power which has happened, and two is you try and improve the internal systems in a way which incentivizes good performance. That to some extent is also happening but is not happening fast enough.

Produce with efficiency to rein in inflation: Subir Gokarn

Produce with efficiency to rein in inflation: Subir Gokarn (1)

Produce with efficiency to rein in inflation: Subir Gokarn (2)

The burden of debt

Will SAHAJ make your life simple?

No RBI licence for 11 co-op banks in state

As many as 11 cooperative banks, including the Maharashtra State Cooperative Bank, in the state are functioning without a licence from the Reserve Bank of India. Similarly, 11 banks do not comply with Section 11 of the Banking Regulation Act. One bank in Western Maharashtra controlled by an NCP leader is facing a probe into an estimated Rs 100-crore fraud.  These facts had emerged after the board of directors of the MSCB was dissolved and an administrator appointed by the RBI. NABARD officials said MSCB was one of the banks that was not qualified to receive the RBI licence as its performance was not satisfactory. "For a bank to receive RBI licence, it has to have a satisfactory performance. This means the bank was unable to maintain a four per cent CRAR (capital-to-risk weighted asset ratio) as stipulated by RBI," said Nabard regional general manager K Venkateswara Rao on Friday.  However, Rao hastened to add satisfactory performance does not mean the bank was in an unhealthy state. "It means the banks have to raise their bar to the yardstick set by the RBI. At least 11 banks in the state are functioning without a licence as they do not comply with the RBI's norm,” he said.  NABARD officials, however, refused to name the banks which are functioning without licence as "it would lead to unnecessary confusion among depositors." Rao said apart from the unlicensed banks there were also 10 cooperative banks, out of 31 in Maharashtra, that are found not adhereing to Section 11 of the Banking Regulation Act. “These are banks whose net negative worth is increasing. These are banks who are lending but not making provisions if a loan amount is not being recovered or is likely to turn into bad debts,” he said. Officials said in such caes, there is reduction in value of assets compared to funds. Rao said the erosion in deposits reflects the state of the bank. "If there is more than 50% erosion, the condition of bank is not good as per the RBI norms.”

PSU banks to open 1,500 rural branches in 2011-12

Patience is the key to high returns on investment

Saturday, May 14, 2011

VITALINFO - Inconvenience caused is sincerely regretted.

Due to technical problem and unavailability of server, VITALINFO could not be updated on May 13, 2011.  The posts already uploaded on May 12, 2011 got deleted by the server automatically, which have been restored today.  Inconvenience caused is sincerely regretted. The info items dated May 13, 2011 have been included under today's column. 

Sons of the soil shine in civil services exam

"Hard work, determination and persistent studies" was the mantra for success of Mohd Imran and Kumar Gautam, who have been ranked 169th and 388th in the civil services examination this year. A former college teacher Mohd Kaffiluddin's son, Imran is working with Reserve Bank of India as an Assistant Manager in Mumbai and cracked the UPSC exam in his maiden attempt. 

World Bank MD to take stock of city infra projects

MUMBAI: World Bank managing director Ngozi N Okonjo-Iweala will visit the city on Monday to look into the progress of bank-financed infrastructure projects. She will also meet chief minister Prithviraj Chavan and senior government officials. World Bank operations adviser, India, Hubert Nove-Josserand said Okonjo-Iweala will meet Reserve Bank of India governor Duvvuri Subbarao over breakfast.  Okonjo-Iweala's Mumbai visit will be at the end of her journey in India, which began on May 12. A Harvard graduate, she is a former finance minister of Nigeria and holds a Phd in economics from the Massachusetts Institute of Technology.  The World Bank is not pleased with the pace of work on the Mumbai Urban Transport Project (MUTP), which it is financing. It is fussing over extending the June deadline for the repayment of its current loan.

Govt forms panel to review deemed exports policy

The government today said it has formed an expert committee to review deemed exports policy where there have been incidents of misuse of the scheme. Deemed exports refer to those transactions in which goods supplied to the users do not leave the country and payment for such supplies is received either in Indian currency or in foreign exchange.  Last week, the government constituted a panel to improve drafting of the policy aimed at avoiding multiple interpretations, according to a Commerce Ministry statement issued here today. Besides, the group would examine whether the scheme properly reflects the government priorities. The committee has invited comments from stakeholders in this regard. It would also meet RBI Governor D Subbarao and Planning Commission Member BK Chaturvedi for discussions and is expected to submit its report to the Commerce Ministry by August. The panel, which is chaired by Director General of Foreign Trade (DGFT) Anup K Pujari, comprises members from Planning Commission, RBI and Department of Economic Affairs. The committee was formed on the directions of Commerce and Industry Minister Anand Sharma to review the existing scheme. There have been reports that the policy is being misused, especially in the power sector. The DGFT decided to send recovery notices to those under its scanner, sources had said. Recently, the ministry has also tightened the norms governing the scheme, a move expected to save about Rs 1,800 crore to the exchequer annually.

MSCB ignored RBI's directive to clean up act

MUMBAI: Mismanagement and abuse of power apart, the NCP-controlled Maharashtra State Cooperative Bank failed to implement RBI directions, the central bank has found. "In March 1996, the RBI issued directions to the MSC Bank, primarily asking it to improve its performance. But when the RBI undertook a review in March 2010, it was observed that the orders were not implemented properly," an official of the cooperation department told TOI. The RBI had asked the MSCB in 1996 to submit a quarterly compliance report to the National Bank for Agriculture and Rural Development. The MSCB, however, did not comply. "There was utter disregard. The RBI had no option but to dissolve the board of directors," the official said. Among other things, the central bank told the MSCB to withdraw the chairman's discretionary powers regarding sanction or withdrawal in excess of limits. "On record the discretionary power was withdrawn on November 8, 1997. But Nabard found that the chairman had allowed rollover of short-term loan to certain institutions without the approval of the loan committee," the official said. The central bank had also directed the MSCB to reduce the number of loan committee members to maximum 15 and ensure the committee's effective functioning. In response, the MSC Bank cut the membership, but never guaranteed the committee's effectiveness. As a result, loans were sanctioned to cooperative sugar factories and spinning mills having negative net worth. When Nabard submitted its report to the MSC Bank on February 24, 2011, the latter's CEO was asked to place the inspection report before the board of directors, prepare point-wise compliance report, place that before the directors and, finally, forward it to Nabard within 45 days. "Prima facie, it appears that the MSCB did not take Nabard seriously. It failed to submit the compliance report to Nabard within the stipulated period," the official said. Most shocking was the fact that while the bank's state was being discussed in the state legislature, the NCP was in the dark over the RBI's move to dissolve the board of directors and appoint administrators. The party came to know of the central bank's directive through the media.

RBI Sensitizes Himachal Police about vanishing non-banking finance companies

Shimla: Cautioning about dubious non banking finance companies doing a vanishing act in Himachal, Reserve Bank of India executives listed out 28 such fake institution who had duped many depositors. The disclosure was made a one day seminar with top police personnel held at the police headquarters today. Inaugurated Somesh Goyal, ADG, the RBI executives highlighted the role of law enforcing authorities on modus operandi and areas of frauds committed by unscrupulous non banking financial companies. The team was led by Veena Roy Singh, DGM, RBI Chandigarh and included TR Nangal and Peeyoosh Nag. Later DS Manhas DGP also interacted with the participants. The police officer requested RBI to jointly create awareness among public about these vanishing companies so that gullible people could be saved from getting duped by these companies.

Should India’s Monetary Policy respond to Asset Prices?

Ajit Pawar calls for unbiased probe into supersession of bank

As talent war looms, banks offer fat pay hikes

RBI working closely with police to tackle fake notes

The Reserve Bank of India (RBI) was working closely with the police and intelligence agencies to tackle circulation of fake currency notes. Terming it as a “challenging task,” RBI Deputy Governor Shyamala Gopinath said that the apex bank had introduced new safety features in rupee notes to make them secure. It was also conducting regular training programmes for the police to spot fake notes. She was in the city to attend a Bankers' Meet. Addressing a press conference here on Thursday, she said that RBI was focusing on creating awareness among people through a media campaign. It had also brought out a film on this subject. The banks have been directed to have note sorting machines wherever they have currency chests. Further, the banks have been told to identify one nodal police station in every district for this issue. The norms for filing a police complaint regarding fake notes have also been relaxed. She also clarified that banks were responsible for all the notes coming from their ATMs even if the loading of money was outsourced. The best way to beat this menace was to go for cashless transactions. In this direction, RBI had liberalised norms for banking through mobile phones and electronic transfer of cash. As the present rate of inflation was above the RBI's comfort zone, she said, adding that measures had been initiated to tackle it without affecting growth. Commenting on the recent issues with microfinance, Ms. Gopinath said that a new framework had been brought in to prevent problems, such as those witnessed recently in Andhra Pradesh, from surfacing again. The microfinance institutions (MFIs)/non-banking finance companies (NBFCs) were unregulated or lightly regulated during the initial days to help them grow. These institutions have to reorient themselves to comply with the new norms, she added. As part of RBI's platinum jubilee celebrations, it was holding awareness programmes across the country.

Fake bank accounts on sale for Rs 8,000

The Economic Offences Wing (EOW) of the Gurgaon police stumbled upon 26 fake bank accounts while investigating various fraud cases reported in the city recently. The accounts, opened on the basis of forged documents, were used for dubious transactions across the country, especially for fraudulent property deals, the police have found. But what comes as a shocker is that the accused sold these accounts to fraudsters for Rs 8,000-10,000 each. Among these, 21 accounts were found in various private banks while five were in two national banks. During investigation of various economic offences registered in the city, the Gurgaon police found fake accounts and prepared a list.  “It has become a business for many unscrupulous elements to open fake accounts and sell them for a big amount. Most buyers who ‘purchased’ these accounts used it with a wrong motive to dupe innocent people,” said SS Deswal, Gurgaon police commissioner. Sale and purchase of property on basis of fake documents, financial scams, job rackets, lottery scam and other crimes were committed using these accounts.  “The criminals used it as a shield against the law to keep their identity secret with the help of fake accounts.” The scamsters have a vast network in Delhi-NCR and various parts of the country. Among the list of 26 accounts, nine accounts were found in Gurgaon banks, four in Delhi and four in Ghaziabad. The rest are spread across various banks of the country. “The fraudsters take benefit of the negligence of bank employees who often ignore the Reserve Bank of India (RBI) guidelines to open accounts. And the private banks are on the top,” added Deswal.  “We have written to all banks where fake accounts were found in our probe. They have been warned to follow all necessary steps before roping in any new customer so that such incidents can be prevented,” he said.

Reregulation - A dangerous embrace

A SOLDIER HUNCHES over the sights of a heavy machine gun. Its barrel points at the main gate. Out in front, guards briskly move on any cars that loiter. The headquarters of most central banks are described as fortress-like. Few seem quite as impenetrable as that of the Reserve Bank of India.  Its department of banking supervision guards the country’s financial system with equal zeal. “Whenever there is a crisis the state will have to intervene,” says K.C. Chakrabarty, a deputy governor. “If the state ultimately has to intervene at the very last stage, then why not intervene at the very first stage?”

RBI Authorizes 926 Banks to Receive advance Income Tax in Mumbai

Mumbai (ABC Live): The Reserve Bank of India has announced that 926 computerized branches of public and private sector banks will receive advance income tax in Mumbai and Navi Mumbai.  These arrangements have been made for the convenience of the income tax assesses. Of the 926 bank branches 862 branches are public sector bank branches, 35 HDFC bank branches, 10 ICICI bank branches and 19 AXIS bank branches.  The Reserve Bank of India has advised income tax assesses to take advantage of these standing arrangements made for their convenience.  Long queues and inconveniences can be avoided at the Reserve Bank of India counters if the assesses in Mumbai and Navi Mumbai utilise the services being made available at various designated branches of banks and deposit their income tax dues well in advance of the last date.  Information to this effect was made by Ajit Prasad ,Assistant General Manager through RBI Press Release : 2010-2011/165.

RBI panel to interview 7 RBI Executive Directors for Dy Guv’s Post

MUMBAI: A committee headed by RBI governor D Subbarao will interview seven executive directors of the central bank today to select a new Deputy Governor, who will succeed Shyamala Gopinath, slated to retire on June 20. Besides Subbarao, the Secretary Financial Services will also be part of the committee, which will recommend the names to the Governor. The Executive Directors who have been called for the interview are V.K Sharma, V.S.Das, G.Gopalakrishna, H.R.Khan, D.K.Mohanty, S.Karuppasamy and R.Gandhi, said a person with knowledge of the development. "Based on seniority, V.K.Sharma, G.Gopalakrishna and H.R.Khan could be frontrunners for the job," said three senior RBI officials. However, the final decision rests with the government, said the official. V.K.Sharma, who is the seniormost Executive Director, is in charge of the Rural Planning and Credit, Customer Service and Financial Markets. G Gopalakrishna oversees the department of non-banking supervision, department of banking supervision and central security cell. H.R.Khan, another contender for the post, now handles the department of government and bank accounts, external investments and operations, internal debt management and foreign exchange. Of the four deputy governors that RBI has, KC Chakrabarty is a former commercial banker while Subir Gokarn is an economist. Shyamala Gopinath and Anand Sinha are career central bankers.

State launches e-payment for commercial tax payers

Karnataka today became the first state in the country to launch an e-payment system for Commercial Tax payers. Speaking at the launch, Reserve Bank of India Deputy Governor Shyamala Gopinath wanted such a system to be adopted by other states. The system enables dealers to remit their Commercial Taxes anytime, anywhere without physically approaching any office of the Commercial Taxes Department (CTD). Right now, e-remittances can be made from six banks — SBI, SBM, SBH, Syndicate Bank, Canara Bank and Union Bank of India.  Chief Minister B S Yeddyurappa said more public sector banks would be added to the list going forward. He said the system would also help curb tax evasion. Gopinath launched the reconciliation portal of the CTD. Commercial Taxes Department officials said, the new model was a “comprehensive e-payment reconciliation system” that would “run seamlessly from the dealer up to the Government treasury”. The CTD collects over Rs 2,000 crore per month and till now, these collections were by way of cheques by the dealers. Every month on an average more than 100,000 cheques were received by various offices of the CTD and these are then sent to the agency bank, which in turn processed them and remitted to the Government account. This involved a huge amount of manual work and at the same time, delay in realisations of amount and some cases of bounced cheques also. The reconciliation process was very difficult. Also, dealers were inconvenienced as they had to come to the respective offices and wait in a long queue to remit the tax.

One number to rule all transactions

The unique ID may be used for all securities transactions, helping to curb fraud and increase transparency.
Continue reading.......................

Microfinance after Malegam – M.S.Sriram

The new realities, predicated on RBI’s acceptance of the Malegam framework, are yet to hit microfinanciers.  By accepting the spirit of the Malegam panel report, the Reserve Bank of India (RBI) has taken a step away from its regulatory approach towards the financial sector and from its approach towards microfinance. This step, of controlling interest rates and margins, has been introduced at a time when RBI governor D. Subbarao has indicated his “bias” for deregulation of interest rates on savings accounts (Mint, 4 May). For once, RBI has put the brakes on microfinance institutions (MFIs), after having allowed them to grow at an uncomfortable pace. While the central bank has removed the sting from the Malegam recommendations by moving the interest cap to 26% and the margin cap to 12%, the step is myopic. These controls are applicable to organizations that want to avail resources from the priority sector lending window. For others, it could be business as usual.  In accepting this framework, RBI has only partially addressed the issue of client protection that led to the Andhra Pradesh crisis. The central bank’s notification gives choice to the borrowers on repayment periodicity; it remains silent on coercive recovery practices.  It protects clients by putting Rs. 50,000 as an upper ceiling for credit—a measure that freezes the poor households’ enterprise at one buffalo and a fraction of the price of a good hybrid cow. Given that there are no mezzanine institutions that can fill in the gap after this limit, RBI is in effect punishing poor households emerging out of poverty under the guise of protection. It would have been desirable to peg the limit at Rs. 2 lakh, which is RBI’s definition of small borrowal accounts. This would have given MFIs the scope to innovate and cross-subsidize between their large and small borrowers. MFIs which are on the treadmill of small finance, quick turnaround, efficient operations and scale, will benefit from the move. The regulation is loaded against small MFIs that cannot negotiate cheap finance and maintain costs in the 12% band. If this regulatory framework continues, we will see substantial consolidation in the industry.  One recommendation—that MFIs should have a minimum capital of Rs. 15 crore—does not appear in RBI’s notification. The central bank is known for its bias for large organizations, so that regulation becomes viable. We will see action on this front after the Usha Thorat committee submits a report on the comprehensive review of the legal and regulatory framework of non-banking financial companies. With the interest and margin caps, there are implications. The margin cap would push MFIs towards automation, efficiency and cost cutting. The first to face the brunt will be the credit officers whose alternatives at this time are limited. They would see a drop in their incentives.  Also, with so much of chatter around profiteering from the poor, MFIs may limit the shareholder returns to benchmark with the banking industry. The benefits of the efficiency gains will disproportionately move to the top management, as current compensation rather than equity options. The exuberance of the investors will be moderated. Microfinance is no longer a hot destination for private equity/venture capital/hedge funds. The possibility of diversified income is limited by the other conditions, and we can expect private sector investments in MFIs to slow. With an income condition for the client (upper ceiling of annual income of Rs. 60,000 in rural areas and Rs. 1.2 lakh elsewhere), MFIs that fall within the priority sector ambit will move away from rural locations. While this difference appears to recognize the difference in the purchasing power and income opportunities in urban locations, it is negated by the common upper limit amounts and the tenor of loans.  While openly welcoming the new regulation, several actors may not have internalized the implications in the way the details are tucked in:
i) The loan amount cannot exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles;
ii) Loans exceeding Rs. 15,000 should have a tenor of more than 24 months;
iii) 75% of the loans are to be given only for income-generation purposes.
The exposures of MFIs usually carry a one-year tenor, effectively putting an individual loan-size cap of Rs. 15,000. The chief beneficiaries of this policy are the auditors who would certify that:
i) The income of the borrowers representing the “qualifying asset” is less than specified limits;
ii) At least 75% of the borrowers’ indebtedness is on a productive loan;
iii) That 85% of the assets are “qualifying assets”.

RBI might not have had the time to see how much the auditors would charge to give these certificates, and whether these verification costs (over and above high delivery costs) can be covered within the ceiling of the 12% margin limit between borrowing and lending rates that the central bank has fixed.  The benefits of the priority sector loans may not be commensurate with the costs of complying with the conditions. Even if the average cost of borrowing is around 14%, and an MFI gets an yield of 26-30%, it may not want loans under the priority sector. However, the question is whether the banks will lend to these institutions if they shed the microfinance tag. Even if they do, will the pricing be attractive? We have to wait for the bullishness of MFIs to wane and the reality to hit them. That is a while away. 
MS Sriram is an independent researcher and consultant, and former professor at the Indian Institute of Management, Ahmedabad.

Thursday, May 12, 2011

RBI apprehensive on portfolio inflows, wants more FDI


BANGALORE: The Reserve Bank of India today pitched for increased foreign direct investment into the country, even as it expressed apprehension over the quality of portfolio inflows. RBI Deputy Governor Shyamala Gopinath said India has been able to absorb capital inflows because it has a current account deficit. "But we have expressed apprehension on the quality of inflows in terms of portfolio inflows," she told reporters on the sidelines of a function here. "But as we see today, we are not seeing too much volatility in that sense. But we would want more of FDI to come in so that quality of the flows do alter," she added. Gopinath also said the RBI would issue draft guidelines on new banking licences in the next couple of weeks. "We are in consultation with the government (in regard to draft guidelines). There is no tussle with the government as such," she said in response to a question, adding that the RBI and the government converge on many issues vis-a-vis these guidelines. When asked about SKS Microfinance "struggling" with Andhra Pradesh government norms, Gopinath said the RBI expects MFIs (Microfinance Institutions) to be in full compliance with its regulations. She said the RBI hopes the Andhra Pradesh government takes a relook at its (Andhra government's) regulations to ensure that MFIs are able to function in that state. Gopinath also said rising commodity prices, particularly oil and gas, would add to the inflationary pressures, adding that the other factor driving inflation is that the price rise has not been factored in the administrative price of items like fuel. "So, yes, we would be impacted if commodity prices go up substantially," she added.

Imposing policy discipline among nations may be tough: Duvvuri Subbarao, Governor, Reserve Bank of India

MUMBAI: Imposing economic policy discipline among nations may be elusive for many years as the fundamental analysis required to come out with an acceptable policy is not in place, Reserve Bank of India Governor Duvvuri Subbarao said. Enforcement of policies will also be difficult. "It is far too early to think of reaching new formal international agreements on policy behaviour," Subbarao had said at the SNB-IMF Conference on The International Monetary System, Zurich. "Instead, countries will prefer to proceed through more exchange of information, peer review processes and ad-hoc international agreements, depending upon the situation prevailing at any point of time," he said. Economic policies practiced by countries have begun to differ widely in the last few months, compared to the 'co-ordinated action' chorus that was advocated during the credit crisis when central banks pumped in liquidity in an unprecedented way and cut rates to as low as zero. With the crisis behind and the outcomes of loose monetary policies varying between countries, leaders may not agree to a common policy. While the West may still need an easy policy, emerging nations may have to make funds expensive to rein in prices. "Developing consensus on a code of discipline will be challenging," said Subbarao, while speaking on a topic 'Policy Discipline and Spillovers in an Inter-Connected Global Economy'. There's difficulty, "in reaching international agreement just in the specific field of financial regulation. It will be even more difficult to reach a consensus on broader economic policy,'' he said. The two major disruptions in the global economy in the recent past have been the so-called Quantitative Easing 2, or printing currency by the US, and the undervalued currencies in some countries. China has been accused by the US and others of keeping its yuan undervalued to export more. That is hurting producers in other nations.  Global economic analysis that focuses on trade alone to assess the impact of policies in various nations itself is flawed, said Subbarao. Econometric models are not factoring in events such as the financial crisis, tech bubble burst and such developments are making any international consensus difficult. "Recent experience shows that our understanding of the nature of these linkages is seriously deficient," said Subbarao. "In fact, standard econometric models still suggest that shocks in one country have very small effects on others. They do that because they assume that trade is the primary channel for transmitting these shocks across countries, and trade moves in line with GDP."

CAPITAL INFLOWS VOLATILITY NOT A PROBLEM: RBI

In the debate during the SNB-IMF Conference upon The International Monetary System in Zurich, Subbarao said: “In India’s case, the concerns upon this comment now have been reduction strident given collateral inflows have been indispensable to financial the stream comment deficit.”But the combination of the inflows stays an emanate as about three-quarters of the stream comment necessity given 2009 has been financed by flighty collateral inflows, Subbarao said. It might be remarkable which India’s stream comment necessity was during $9.7 billion in the Dec entertain as opposite the $12.2 billion in the same duration the year ago.Some taking flight economies have been in the process connect given taking flight acceleration calls for parsimonious financial process though aloft seductiveness rates will feature flighty collateral inflows following the second turn of quantitative easing by the United States, he said.Last week, the RBI stepped up the quarrel opposite taking flight prices, by augmenting seductiveness rates by 50 basement points. China stormed behind to post the large traffic over-abundance in Apr as exports strike the jot down whilst imports eased some-more than expected, weighed down by postulated financial tightening as well as tall commodity prices.The United States has claimed which the yuan, additionally called the renminbi, was undervalued as well as gave Chinese exports an astray traffic advantage. In an strong anxiety to China’s sell rate policy, Subbarao said: “India’s (exchange rate) process is theme to disastrous externalities from countries which say undervalued sell rates, undermining the competitiveness in third markets as well as the efforts to enclose the stream comment deficit.”“In India’s case, the rupee’s sell rate has been probably stretchable in the past dual years, as you have not intervened in the unfamiliar sell market. The tiny enlarge in pot reflects assorted accruals, seductiveness gain as well as gratefulness changes.” RBI upon Tuesday, additionally set up the cabinet for streamlining unfamiliar sell sell as well as additionally invited comments from open as well as alternative stakeholders for mending comforts regarding to investments as well as repatriation of funds.In the matter it pronounced which the cabinet chaired by former RBI Deputy Governor K J Udeshi was to facilitate procedures for facilitating genuine unfamiliar sell sell by individuals. The people have been categorised in to residents, non-resident Indians (NRIs), Persons of Indian Origin (PIOs) as well as expatriates in use in India underneath the Foreign Exchange Management Act (FEMA), 1999.

MSCB unaware of RBI move : Ajit Pawar

Deputy chief minister Ajit Pawar on Tuesday said the management of the Maharashtra State Co-operative Bank (MSCB) had no inkling about the Reserve Bank of India’s (RBI) decision to dissolve the bank’s board of directors. Speaking to reporters in the city after attending a review meeting of kharif season with the Pune district administration, he said, “If the central bank had informed us earlier of such an action, we would have taken steps to prevent it.”  The RBI dissolved the board of the bank on May 7 due to its dire financial condition. The move has unruffled the Nationalist Congress Party (NCP) leadership, as a majority of the directors belong to the party, who have termed the action as “politically motivated to defame the NCP”. Pawar said he would be scrutinising the bank papers on Wednesday before making any statement to the media. “The bank chairman, Manikrao Patil, is examining the documents today. It would be unwise for me to make any comment at this juncture,” he said.

Volatile commodity prices may drag down India growth

NEW DELHI: Finance minister Pranab Mukherjee on Wednesday warned volatile commodity prices may drag down the country's annual economic growth to below an estimated 9 per cent in this fiscal year, a week after indicating further rises in oil prices could shave 1 percentage point off Asia's third-largest economy's growth.  Pranab Mukherjee also said inflation was likely to remain at elevated levels between 7-7.5 per cent during this period, at least a per centage point higher than the central bank's end-March 2012 projection of 6 per cent.  Oil prices rose to 32-month peaks in April due to tensions in the Middle East and North Africa, but a combination of a stronger dollar and signs of cooling in China has brought down prices.  ICE Brent crude futures were 39 cents lower at $117.24 a barrel by 1058 GMT, having earlier risen to as high as $118.43.  "Due to volatility in international commodity prices and other supply constraints, it may not be possible to achieve the growth rate of 9 per cent, +/-0.25 per cent, for the current fiscal," Mukherjee said in a statement.  While private economists are increasingly trimming their 2011/12 growth forecasts for India, citing high inflation, rising interest rates and high oil prices, the government has not yet officially revised down its growth forecast.  India's central bank has forecast an annual economic growth of around 8 per cent for this fiscal year on the assumption that crude oil prices would average $110 a barrel over the full year.  While higher oil prices are threatening to slowdown the economy, they are posing inflationary risks.  Headline inflation surged to nearly 9 per cent in March, well above forecasts, prompting the central bank to raise key rates by a bigger-than-expected 50 basis points to tame stubbornly high inflation last week.  The Reserve Bank of India (RBI), which has raised its main operating policy rate by 250 basis points since March 2010 in nine moves, expects the headline inflation to remain around 9 per cent in the April-September period. The RBI Governor Duvvuri Subbarao on Monday reiterated India will maintain its anti-inflationary stance even if that means sacrificing growth in the short term. [ID:nL3E7G918K] High inflation is seen preventing New Delhi from passing on high global crude prices to domestic consumers, a decision that has a bearing on its fiscal health.  A ministerial panel meeting to consider raising fuel prices was deferred on Tuesday, signalling the government's reluctance to tackle a political hot potato that is needed to bolster public finances, but which could also stoke inflation.  Any hike in prices of diesel and gasoline is expected to be small, given the political sensitivity of such a move for hundreds of millions of poor who form the bedrock of support for the government. Even a small rise would help limit the government's fuel subsidy burden to a budgeted $5.2 billion for 2011/12 and help it meet its fiscal deficit target of 4.6 per cent of gross domestic product. But the government also appears wary of the effect of raising fuel prices on headline inflation. Even a 10 per cent hike in petrol and diesel prices would add around 70 basis points directly to headline inflation, brokerage Nomura said in a report late last month.

Foreign banks' CEOs responsible for regulatory compliance: RBI

Concerned over the way the foreign banks are functioning in the country, the Reserve Bank today said that their Indian Chief Executive Officers (CEOs) would be responsible for oversight of regulatory and statutory compliances.  "It has been decided that for all foreign banks operating in India, the CEO would be responsible for effective oversight of regulatory and statutory compliance as also the audit process and the compliance thereof in respect of all operations in India," the RBI said in a notification.  The notification comes amid reports of fraud in branches of leading foreign lenders like Citibank and Standard Chartered Bank. As many as 34 foreign banks including global leaders like HSBC and Deutsche Bank are having operations in the country.  RBI has also expressed concerns about "the adequacy of regulatory compliance by foreign banks in India" and the practice of the unit heads of foreign banks reporting directly to Functional Heads located outside the country and not to the Indian CEOs.  It further noted that Indian operations of foreign banks functioning in India as branches of the parent banks generally do not have a separate Audit Committee vested with the responsibility of examining and reviewing inspection reports for their compliance.  Following the notification which was communicated to all foreign banks, their CEOs will be responsible for compliance with the norms of the central bank.

SBI to introduce green-channel banking at more branches

State Bank of India (SBI) will introduce “green-channel banking” at more of its branches to promote paperless work and to facilitate faster transactions for customers, SBI sources said.  All major transactions, including withdrawals, deposits and remittances up to Rs 40,000, will be made through green-channel banking, which was introduced at 26 out of 680 branches of the bank in the first phase, the bank’s General Manager (Network-II), Devendra Prasad, said on Wednesday. Although there was no specific number of branches to be covered in the state with these facilities in the second phase, several more branches -- including some at Berhampur, in Ganjam district -- are expected to introduce green channel counters. “Since there is no paperwork in this initiative, it is called green-channel banking,” said Mr. Prasad, who was here to address customers and inspect some of the branches. The customers need not fill up any pay-in slip or cheque for depositing or withdrawing money from their account. Instead they could access the services of ATMs. “In this way, there will be no requirement of paperwork and the process of money transaction will be fast,” he said. Around 28 per cent of the bank’s total transactions, mostly deposits are made through alternative channels, including mobiles, the internet, ATMs and green-channel banking, in 2010-11.  He said the bank would add more branches in the state during the current year. In the last financial year, it had opened 11 branches in the state.

RBI move to help reduce fake diamond export

SURAT: In what is seen as a step to curb the fake diamond exports and the round tripping of the funds and diamonds by the diamond merchants, the Reserve Bank of India (RBI) has reduced the term of letter of credit (L/C) from one year to just 90 days for the import of rough and polished diamonds. The Gems and Jewellery Export Promotion Council (GJEPC), apex body of the Indian diamond industry, has welcomed the step taken by the RBI. "It is a good step taken by the RBI. The reduction in the term of L/C will discourage fake diamond exports from the country and will help the genuine trade to prosper," said Sanjay Kothari, vice-chairman, GJEPC.
Kothari said there were elements in the diamond industry who were taking wrong benefits of interest arbitrage from the local and the foreign banks through the extended period of L/C. Official sources said the GJEPC had made several representations to the ministry of commerce and the RBI for reducing the L/C term in order to discourage the elements in the industry for taking undue benefits of availing cheap bank finance and interest arbitrage. Sources said the diamond importers open L/C with the local bank against fixed deposit as a guarantee to the supplier bank that his payment is secured. Once the foreign supplier's bank receives the L/C, it dispatches the goods to the importer's bank in India. For paying the overseas supplier, the importer takes a loan from a foreign bank, which at Libor plus 200 basis points works out 5.5-6 per cent cheaper than what is charged by a local bank. This loan is given to the importer against a guarantee from the local bank with which the trader has opened the L/C. Since the term of L/C has been reduced to 90 days, instead of one year, the diamond importers could not earn the benefit of interest arbitrage, which he used to get from the local bank till now by selling off his cut and polished diamonds at a certain value and earning 7-8 per cent interest on the fixed deposit.

Is RBI helping or hurting you?

The Reserve Bank of India has been battling for months to protect you from high inflation. Ironically, in its war against high prices-that intensified with a sharp hike in interest rates recently-the RBI has also managed to raise the cost of living for some.  All EMI-funded purchases get more expensive every time interest rates are raised. And if high rates also begin to hurt corporate earnings, dividends and returns from stock investments will also be impacted. So, is the central bank really helping you or not?

Debt management office may be reality soon: Sources

Days after RBI Governor D Subbarao opposed the proposal to set up a debt management office (DMO), sources in the finance ministry have told CNBC-TV18 that, while more discussions would be held between the ministry and the RBI, the fact remains that the proposed DMO would indeed become a certainty at some point of time. Sources added that the RBI board may meet on May 19 to discuss the proposal. Once the central bank gives its final views on the matter, the government would begin the process of setting up a full fledged DMO. Finance Minister Pranab Mukherjee in his budget this year had announced setting up a DMO.

RBI clamps down on Maha coperative banks

The Reserve Bank's drive to tighten its control over co-operative banks has taken a political twist but CNBC-TV18’s Gopika Gopakumar reports that according to the RBI, this was just another day in the office. The RBI has hit a nerve, as it cracks down on co-operative banks. Its order to the Maharashtra government to supersede the Board of Maharashtra State Cooperative Bank (MSCB) and appoint administrators has political leaders like Maharashtra Deputy Chief Minister Ajit Pawar and Union Agriculture Minister Sharad Pawar miffed. Sharad Pawar blames the state government for the mess and Ajit Pawar says the Congress leadership has instigated this politically motivated action. The reaction is not surprising; say sources, since the bank was a source of funds to run cooperative sugar factories, spinning mills and dairy units.  Sources say that this action has been on the anvil for a while now. In 2005, both RBI and NABARD had issued directives to the bank asking it to reduce its exposure to the sugar sector. They said that 50% of its Rs 7,800 crore loan portfolio was to the sugar sector, and this was unacceptable. They had also directed the bank to reduce the number of board members from 57 to 20. The RBI order says as on March 2010, MSCB had a loss of Rs 800 crore and a negative net worth of Rs 144 crore. Also, its gross non-performing assets stood at 20%. it also said that the bank board had taken several decisions that were not in the bank's best interests. These irregularities came to light at NABARD's annual inspection in FY10. The NABARD report also highlighted a Rs 778 crore shortfall in provisions and said loans to sugar factories were rescheduled in November 2002, March 2005 and March 2007 without sufficient provisions. Sources say the Maharashtra government will now have to either call for elections within the next two months to appoint a new board, or bailout the bank. For the RBI, this is just one more in an ongoing crackdown on errant co-operative banks. This year alone, it has penalised 27 co-operative banks for various irregularities and sources say more cooperative bank boards could be superseded going forward.

Retail investors shouldn't ape FIIs

Since the beginning of this month, foreign institutional investors (FIIs) have been net sellers in the Indian equity market. For a market largely fuelled by the FII movement, it resulted in both the Bombay Stock Exchange’s (BSE’s) Sensex and the National Stock Exchange’s Nifty to lose close to five per cent in the same period. According to BSE data, the net equity sold by FIIs was Rs 3,645 crore between May 2-10. However, in the preceding months — March and April — FIIs were net buyers (Rs 8,399 crore). Although India’s high inflation has been a cause for concern for some time now, the post-Budget buying by FIIs showed that they still expected the corporate sector to deliver. But that didn’t happen. The results for the quarter ended March were not on the expected lines, with corporate margins under pressure. The latest selling spree by FIIs, however, was sparked off after the Reserve Bank of India (RBI) raised interest rates by 50 basis points (bps) rather than the expected 25 bps last Tuesday. Most FIIs have not been enthused by RBI’s stance that it is willing to sacrifice the economy’s growth to curb inflation.

MSC Bank was working without licence: Nabard

Mumbai: The NCP-controlled Maharashtra State Cooperative Bank (MSCB) was operating without a licence. Nabard, the cooperative and rural banking regulator, has stated the point in a 169-page report, based on which the RBI dismissed the MSCB board of directors a week ago. While the NCP has cried foul, saying the decision was politically motivated, the Nabard report has revealed one skeleton after another in the MSCB closet.  Nabard has observed that the MSCB board conducted its affairs against the interests of depositors, concealed non-performing assets, completely ignored the RBI’s statutory orders, sold the properties of borrowing units acquired under the Securitisation Act much below the reserve price, sanctioned non-agriculture loans without authorization from Nabard, waived huge interest amounts in violation of the Cooperative Societies Act and enhanced credit limits to units having negative net worth.

Wednesday, May 11, 2011

Draft norms on new banking licences soon: RBI official

Reserve Bank of India (RBI) would shortly come out with draft norms on new banking licences, a senior RBI official said.  "RBI will shortly come out with draft guidelines on new banking licenses", B Mahapatra, CGM in-charge of Department of Banking Operations and Development, RBI, said.  Last year, RBI circulated a discussion paper on new banking licences which said that corporates and Non Banking Financial Companies (NBFCs) would be allowed to promote banks. The apex bank had already circulated the discussion paper on deregulation of savings rates, Mahapatra said here today.
DNA

Bank on Your Mobile

In India, retail stores like grocery and medical shops have a very important role, especially for the poor and rural people. They sell medications by the pill, shampoo in tiny sachets, cell phone minutes in small denominations, and frequently extend credit when needed. Mobile as an access channel has the potential to bring a whole host of people that have no/little access to land line or Internet connection onto an electronic branch-less banking platform-an innovative way to generate financial inclusion in the country. In the last few months we saw many large Indian banks tying up with large mobile service providers and handset vendors to increase their reach through the mobile channel by providing access to financial services through their mobile phones. The service will enable consumers to transfer money to other individuals, withdraw cash from business correspondents and ATMs and recharge SIM cards by using their mobile phones. The Reserve Bank of India (RBI) has been attempting to make it easier for Indian banks to reach rural people by allowing them to appoint 'banking correspondents' to handle delivery of cash and accept cash deposits, opening of new accounts and other services for the unbanked and under-banked population segments in remote locations where there are no bank branches. The tie up between banks and service providers/ handset vendors will be a win-win situation for both as they can leverage on a large user base of 750 million.  In all the tie ups-be it Bharti Airtel-SBI, Idea-Axis, Vodafone-ICICI bank or Nokia-Union Bank-this system is being tried to cover all areas of India and also to reach out to a larger base of population which is not being connected to the traditional banking route. These tie ups will also help banks to understand the telecom industry. They can also look at financing service providers for their future expansion as the industry is going through a lean phase, and investor confidence is at an all time low. Banks will engage such retailers as Customer Service Points (CSPs) all over India thereby leveraging on mobile retailers as their extended arm. The mobile subscribers will visit these outlets and open their bank accounts and avail of banking products and services closer to their home. The retailers benefit by getting some extra commissions from these innovative transactions. The service providers/handset vendors also benefit by increasing their bouquet of services and making some money from banking transactions as their margins have shrunk due to increased competition between operator/handset vendors. These services have started in a small way but one has to see how this shapes up. The success of this new innovation will open up new opportunities for bankers and service providers/handset players.                           Pravin Prashant 

Loans to NBFCs in agriculture space could get priority tag

NEW DELHI: The government may ask the central bank to accord priority sector tag to bank loans to smaller non-banking finance companies that lend largely to agriculture and small and medium enterprises.  The Reserve Bank, in its monetary policy review last week, had struck down NBFCs from banks' priority list except for those lending to microfinance institutions. Banks are required to lend 40% of their total advances to 'priority' sectors, including agriculture, SMEs and MSMEs and weaker sections. Non-banking financial companies, which now face a cut in financing after the RBI move, have petitioned the different arms of the government, including the ministry of small and medium enterprises, or MSME.  "We expect that RBI should take a lenient view on those asset financing companies, which finance agriculture and SME sector through loans for equipment, plant and machinery, and also to small road transport operators (SRTOs)," said a government official. The Reserve Bank is also expected to take up this issue on May 13 when a working committee on NBFCs, headed by former RBI deputy governor Usha Thorat , will meet industry representatives.  RBI has expressed concern over a 55% increase in credit to NBFCs in the year ended March 2011 as compared to a 20% increase in the overall bank credit. "RBI's concern is that whether this increase is because NBFCs are lending for activities that banks are restricted to. They want to remove such regulatory arbitrage," said a finance ministry official.  The government admits that bank loans to systemically important NBFCs, which are mostly into 'loan and investments', should not be tagged as priority. "We support RBI's view that there should be a more stringent framework for such NBFCs who may have taken exposure in capital markets as well," the finance ministry official said.  Any non-deposit taking NBFC which has an asset size of 100 crore is considered as systemically important. This would mean loans to NBFCs such as Reliance Capital and Indiabulls won't be considered as 'priority' even if RBI relaxes the norms.  Banks, however, feel that any change in regulation is not going to impact their priority sector portfolio. "We have a large network of regional rural banks, and also with financial inclusion agenda being pursued we will meet the targets," said an executive director with a north-based state-run bank.

RBI sets up panel on forex facilities to individuals

The Reserve Bank of India (RBI) today set up a committee for streamlining foreign exchange transactions and also invited comments from public and other stakeholders for improving facilities pertaining to investments and repatriation of funds. The RBI, while referring to the Monetary Policy Statement for 2011-12, said in a statement that the committee chaired by former RBI Deputy Governor KJ Udeshi has been set up to streamline and simplify the procedures for facilitating genuine foreign exchange transactions by individuals.  The individuals are categorised into residents, non-resident Indians (NRIs), Persons of Indian Origin (PIOs) and expatriates employed in India under the Foreign Exchange Management Act (FEMA), 1999.  The committee will identify areas for streamlining and simplifying the procedure so as to remove the operational impediments, and assess the level of efficiency in the functioning of authorised persons, including the infrastructure created by them," the RBI said.  The banking regulator also invited comments and suggestions relating to forex transactions by individuals through post or e-mail by June 9, 2011. "The comments or suggestions could relate to deposit account, investment facilities, acquisition and sale of immovable property, remittance or repatriation of funds, remittance facilities for individuals or any other related procedural issue," the apex bank said.

Subbarao’s debt office view foxes North Block


New Delhi: RBI governor D Subbarao’s statement on Monday against an independent profile for the debt management office (DMO) has surprised finance ministry officials. The draft legislation to set up the office as an autonomous institution is already with the law ministry for vetting, though there is no decision yet on when it should be tabled in Parliament.  A source familiar with the developments said the RBI was involved at every stage of the plan for the DMO. “They have made their observations to the government in the course of the discussions.” The RBI, it is understood, has expressed its reservation, but “the government of India has made a decision”. Mandarins are accordingly puzzled the governor chose to go public on the issue when it was apparently sorted out. However, they refused to speculate on the development as a possible incipient turf war between the heads of monetary and fiscal policies in India. In Budget 2011-12, finance minister Pranab Mukherjee said he would introduce the debt management office Bill to handle the issuance of public debt. The RBI opposition could unsettle this promise as the standing committee on finance in the legislature could decide to stonewall the Bill in view of the differences. The DMO plan was first floated in Budget 2007-08, but got delayed over differences between the RBI and the finance ministry on the need for such an office. It was revived by Mukherjee. Once the Act is in place, the management of public debt including the floating of all government papers will be handled by the office. It will manage the registration of primary dealers and take a call on the types of papers the government should float in the debt market. When the Centre decides to float India’s debt papers abroad, the DMO will be very useful, say experts. It is expected that state government loans will also be eventually managed by the DMO. However, the government has given up its nascent plan to make the DMO a public sector entity to ensure greater control over its functioning. Rajiv Kumar, director-general of Ficci and eminent economist said he disagreed with Subbarao’s take on the DMO.  “It will optimise the performance of the debt portfolio of the government and minimise costs. The DMO is a promising idea that needs to be pushed,” he said. Government experts who have worked on the plan said the DMO will not harm the sovereign right of the finance ministry to set the quantum of market borrowing for the year in consultation with the RBI. Also, the borrowing calendar for the year, which is now issued with a six-month horizon, will also include RBI inputs. Since the draft of the Bill also envisages an RBI nominee in the board of directors of the new institution, the opposition from the central bank was difficult to understand, they said. Subbarao will, however, enjoy the support of state governments which feel the DMO will make them even more reliant on the Union finance ministry, at a time when they have to depend on market borrowing to meet their needs.

Subbarao's debt...

RBI’s turf wars

RBI Governor D. Subbarao has, for the first time, explicitly and openly spoken against the government setting up its own Debt Management Office (DMO). The world over when central banks have modernised and moved their focus to monetary policy, they have got rid of conflicting objectives and additional responsibilities. And the government has proposed to set up its own DMO which would minimise the cost of its borrowing, go about it professionally, and do so without forcing banks to buy government securities in the statutory liquidity ratio environment. In his budget speech of 2011-12 the finance minister announced that it would be accomplished this year. Yet it seems the RBI would like to retain this job, regardless of whether this is the best allocation of responsibilities for the country or not.  This is especially disturbing in the present context. In the most recent credit policy, Subbarao had indicated that the RBI would conduct monetary policy with a focus on controlling inflation. The difficulty with the RBI’s present framework is that there are conflicting objectives. So, should interest rates be raised with a view to having an impact of monetary policy on inflation when the government has large borrowings and an increase would raise interest expenditure of the government? The moment the RBI says that it opposes setting up an independent DMO, it says more about the RBI’s priorities than raising the repo rate by 50 basis points does. It indicates that inflation control is not its top priority. In this scenario, it will be difficult for the RBI to change the public perception, as it tried to do with the credit policy announcement and the hawkish tone of the governor’s speech.  He suggested there should be a monetary policy committee structure and the RBI should have autonomy. In other countries, when this is so, it is part of giving the central bank a clear single mandate, often inflation-targeting, and then making it accountable for that mandate. Without accepting accountability, the RBI cannot realistically expect to be given autonomy. A public institution should be responsible to the people of India. A clear framework in which this system of accountability will work can pave the way for greater autonomy. However, today, the RBI has, barely a few days after its hawkish credit policy, quickly backed away from accepting responsibility for inflation and is back to fighting turf wars on the DMO. It is a pity, and it will unfortunately take credibility away from the RBI’s credit policy announcements. A monetary policy committee cannot compensate for lack of credibility.

Should the savings bank rate be deregulated?


The initiative will neither help banks nor borrowers since the cost of funds will rise, but it will provide greater scope for product innovation and service excellence.

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Rajeev Malik: Lower growth, higher inflation

The government finally appears to be in sync with the Reserve Bank of India (RBI) on the broader macro management. Fiscal dynamics have been a key factor in making the aggressive tightening in the current cycle less effective. The solution to that is not necessarily even more tightening – which may still be needed – but greater fiscal responsibility, as the long overdue increases in local fuel prices will finally show. Still, more fiscal adjustment is needed.
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Imposing policy discipline among nations may be tough: Duvvuri Subbarao, Governor, Reserve Bank of India

MUMBAI: Imposing economic policy discipline among nations may be elusive for many years as the fundamental analysis required to come out with an acceptable policy is not in place, Reserve Bank of India Governor Duvvuri Subbarao said. Enforcement of policies will also be difficult.  "It is far too early to think of reaching new formal international agreements on policy behaviour," Subbarao had said at the SNB-IMF Conference on The International Monetary System, Zurich. "Instead, countries will prefer to proceed through more exchange of information, peer review processes and ad-hoc international agreements, depending upon the situation prevailing at any point of time," he said. Economic policies practiced by countries have begun to differ widely in the last few months, compared to the 'co-ordinated action' chorus that was advocated during the credit crisis when central banks pumped in liquidity in an unprecedented way and cut rates to as low as zero. With the crisis behind and the outcomes of loose monetary policies varying between countries, leaders may not agree to a common policy. While the West may still need an easy policy, emerging nations may have to make funds expensive to rein in prices. "Developing consensus on a code of discipline will be challenging," said Subbarao, while speaking on a topic 'Policy Discipline and Spillovers in an Inter-Connected Global Economy'. There's difficulty, "in reaching international agreement just in the specific field of financial regulation. It will be even more difficult to reach a consensus on broader economic policy,'' he said.  The two major disruptions in the global economy in the recent past have been the so-called Quantitative Easing 2, or printing currency by the US, and the undervalued currencies in some countries. China has been accused by the US and others of keeping its yuan undervalued to export more. That is hurting producers in other nations.  Global economic analysis that focuses on trade alone to assess the impact of policies in various nations itself is flawed, said Subbarao. Econometric models are not factoring in events such as the financial crisis, tech bubble burst and such developments are making any international consensus difficult.  "Recent experience shows that our understanding of the nature of these linkages is seriously deficient," said Subbarao. "In fact, standard econometric models still suggest that shocks in one country have very small effects on others. They do that because they assume that trade is the primary channel for transmitting these shocks across countries, and trade moves in line with GDP."